Sumptuary tax

Definition

A sumptuary tax is a tax imposed on an economic activity meant to discourage it. When such an activity is also socially proscribed, the tax is sometimes termed a sin tax.

There are two closely related rationale for sumptuary taxes:

• External costs, i.e., costs imposed on other people who are not in a position to control the transaction. Sumptuary taxes levied purely for the purpose of accounting for external costs are termed Pigouvian taxes.
• Paternalism: The idea that people may not know what is best for them, and hence may be misled into doing things that harm them in the long run. Some reasons for this may be lack of adequate information, addiction, mindlessness, and time inconsistency.